VAT, levies, planning and other costs are making it unviable to build apartments

The multi-family/private rented sector continued to be the top investment asset class of 2022, capturing 37 per cent of the total €3.5 billion investment spend to date. The sector spend in Dublin amounted to over €1.25 billion in 22 main transactions in the first nine months of the year. The outcome for the fourth quarter is dependent on when various deals being negotiated are contracted. However, the outlook for the future is very uncertain as there is a strong possibility that the building of apartments will reduce dramatically through a lack of funding and viability, with devastating consequences for the rental market and Ireland’s housing supply.

The largest residential investment transaction of the year so far involved the forward sale of 242 apartments at Brickfield Square in south Dublin city to Greystar for €123.5 million, which was negotiated by Hooke & MacDonald on behalf of Brian M. Durkan. The second largest transaction was a forward sale of 321 units at Citywest, West Dublin, to Ardstone by Glenveagh for €122 million. The third largest was the forward sale of 190 apartments at Church View, Killiney in south Dublin, by Park Developments to DWS for €100 million.

There is a reluctance at political level to address the fact that 50 per cent of the delivery cost of each apartment is non-construction expenditure

There were 2,792 multi-family properties sold in the greater Dublin area in the first nine months of 2022, totalling €1.076 billion, 85 per cent of these were new builds (2,225 properties worth €891 million) and 15 per cent (567 properties worth €185 million) was existing stock. The estimated net yields on the main transactions that have contracted in 2022 have been between 3.8 and 4 per cent.

From an investment point of view, the fundamentals for demand in the Irish residential market remain the same – a strong employer base, young population, births outnumbering deaths, inward migration and continued movement of the rural population towards the cities. However, there is a reluctance at political level to address the fact that 50 per cent of the delivery cost of each apartment is non-construction expenditure, including VAT, levies, planning and other costs. It is no longer viable to build apartments in most locations in Ireland.

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Internationally, the “living” or “beds” sector has proven itself, even despite the global pandemic, to be one of the most resilient investment sectors, as demand for accommodation remains exceptionally high. As an asset class, it is drawing investors seeking relative stability, long-term vat returns and growth. In Ireland, these investors have facilitated significant new construction, of over 14,000 homes, that would not have been provided otherwise. The problem now is that rental stock levels are deteriorating dramatically and there will be a limited amount of new apartment buildings.

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The demographic trends being seen in Ireland, combined with the strong economic performance, are pointing towards an environment that should foster development and investment in new homes supply for many years to come. However, the challenges around supply and viability are now at crisis levels. Apartment commencements are down 30 per cent in recent months and falling fast.

Disastrous trend

This is a disastrous trend, with much of the blame falling on the hostile planning objectors, high inflation and increased interest rates, along with policies by Government and local authorities that are detrimental to the residential, construction and investment sectors, including the 2 per cent rental cap.

The solutions lie in promoting pro-development measures, not penalising developers and funders who are capable of boosting housing supply

Dublin and other Irish cities and towns are in urgent need of a substantial increase in rental properties, particularly apartments, as they are typically the preferred choice of accommodation of most renters, and are also required under national planning policy to promote higher densities. While Dublin city and suburbs are significantly short of rental accommodation, most urban areas across the State are also suffering from the lack of accommodation, which in turn is causing rents to keep rising.

Solving the housing crisis should be at the top of the Government’s agenda, with radical policies urgently needed. The solutions lie in promoting pro-development measures, not penalising developers and funders who are capable of boosting housing supply. It is a fallacy to believe that the public sector and the taxpayer can fill the gap in funding and construction left by the departure of builders, developers and funds.

Ken MacDonald is managing director at Hooke & MacDonald